With the support of some Republicans, revenue-hungry politicians are contemplating a tax hike on the “private equity” industry. These firms help ensure the efficient allocation of capital. And as Investor’s Business Daily explains, part of their reward for successful investing is a share of the capital gain. In an ideal tax system, there is no capital gains tax. Investments, after all, are made with after-tax dollars. It certainly would be a mistake, therefore, to move in the other direction by more than doubling the rate:
With the Sarbanes-Oxley regulatory regime making life miserable for many public companies, a number of troubled firms have innovatively turned to private equity to better their fortunes — or even save themselves. …So why do prominent members of both parties in Congress, and even the Bush administration’s Justice Department, seem poised to declare war on private equity? …It’s not surprising that Democrat Barney Frank, chairman of the House Financial Services Committee, plans hearings on private equity. More alarming, Charles Grassley, ranking Republican on the Senate Finance Committee, is considering joining that panel’s Democratic chairman, Max Baucus of Montana, in pounding the PE industry with a massive tax increase. Private equity firms usually take a 20% profit share, or “carry,” on their complex deals. Under current law, the carry is subject to the 15% long-term capital gains tax. Grassley wants it taxed at the 35% rate for ordinary income. The New York Times has hailed this “Grassley Tax” on jobs and capital as the first step toward a general capital gains tax hike — a surefire means of pulling the rug out from under the vibrant economy. …Congress will get just $5 billion to $7 billion in annual revenues from the Grassley Tax — hardly worth its ruinous economic costs. …Does the senior senator from Iowa, who likes to tout himself as a tax cutter, really want his epitaph to end up being: “Sen. Chuck Grassley, R-France”?